Don Turner: Unfunded liabilities are sleeping giant for Vermont

Every year, when budget writers in Montpelier begin their work — and legislators begin to determine what to spend — the backdrop of these conversations is marked by a unavoidable reality: Vermont has a serious problem with its unfunded liabilities.

All together, we have a total liability of just over $8 billion — that’s billion, with a “b.” For comparative purposes, that’s larger than our entire state budget. These liabilities are composed of our teachers’ pension ($3.4 billion), teachers’ other post-employment benefits, or OPEB ($0.9 billion), state employees’ pension ($2.7 billion), and state employees OPEB ($1.2 billion). We have a little over $3.5 billion of assets, leaving us with an “unfunded” liability of about $4.5 billion dollars.

How did we get here? Well first, investment returns in these funds have not kept up with expectations. The actual return on investment has fallen consistently below what has been projected. For example, for the state employees’ pension, our actual rate of return of 6.93% was below our assumed rate of return of 7.50% in 2018, creating a net investment loss of over $10 million.

Similarly, our assumptions about demographics have contributed to this challenge. People are living longer and retiring earlier than they once were. Our non-investment net losses were over $42 million for the teachers’ pension in 2018 as a result of incorrect assumptions. This is why the demographic trends that Gov. Phil Scott talks about (such as an aging population) are so serious: not only do they affect our economy and workforce directly, but they have ancillary impacts that are detrimental to our state’s fiscal well-being.

A major contributing factor to this current bloated liability was past-years of underfunding. From the 1990s through the mid-2000s, the Legislature consistently underfunded our pension and OPEB liabilities. It wasn’t until 2007 that we started making full payments. But we’re still feeling the consequences of the lack of funding years ago, and have to make up for it with larger payments today.

Because of incorrect past policies, we now have a schedule to pay off these liabilities by fiscal year 2038. As a result, each year the administration and the Legislature have to allocate millions and millions to pay down these liabilities. And because of the amortization schedule associated with this payback schedule, the next several years will require us to allocate millions more than the previous years.

However, there is some good news. Not only have our annual payment obligations been fully-funded, but this year the governor and Legislature passed the FY19 Budget Adjustment Act, which pays off an outstanding balance of an interfund loan for teachers’ OPEB obligations, and dedicates $3.3 million to make a supplemental payment to the teachers’ pension, which will realize $14 million in savings down the road. Furthermore, last year state government implemented contractual changes which reduced the state employees’ OPEB unfunded level by $211 million.

Still, every year we will have to make millions in payments. These crowd out meaningful investments in other areas, like economic development, affordable housing, social services or tax relief. So, while we must continue to make these important payments to reduce our liabilities, what can we do to achieve a real positive difference in the long term?

David Coates, a member of the Vermont Business Roundtable and the Vermont Capital Debt Affordability Advisory Committee, has suggested setting up a defined contribution plan for new workers. A defined contribution plan is similar to what most comparable employers offer, like a 401(k). This structural change would isolate the pension challenges and set us on a more sustainable path in the long-term. Even if we don’t mandate a defined contribution plan for new workers, we should at least examine the possibility of allowing state employees to opt-in to the existing defined contribution plan.

Another idea has been offered by legislators. Reps. Cynthia Browning (D-Arlington) and Linda Joy Sullivan (D-Dorset) have proposed a 1% tax on teacher and state employee retirement allowance and post-employment benefits. The tax would automatically be phased out once we reach an 80% funded level of our liabilities.

We need to have these conversations about substantive reform if we’re serious about paying down our liabilities while making financially responsible decisions for our state’s future. Until we tackle these challenges head-on, we’ll continue to be kept down by repeated structural budget deficits that threaten our ability to invest and provide relief for Vermonters.

Don Turner is a former state representative from Milton, former House minority leader, current Milton town manager and longtime member of the Milton Fire and Rescue Departments. He was a candidate for lieutenant governor in 2018.

The True cost of burnees Unions bankrupting city’s/towns/states nation wide. Mostly because like
all things financial being run by kick the can down the road demonrats, their run into the ground.
Thanks leftards and thanks unions.. will the left be unionizing all the illegal invaders as well as
giving them free healthcare????

We should make all the retirement payment to the employee in the year that they earned it. That way they have the money for retirement and they know we have kept our promise. It also would keep from indebting our children, grandchildren and great grandchildren with debts.

That would not work, because we don’t know the pension payout for teachers until they retire. They get something like 50% of their highest 3 years of pay. Usually that is near the end of their working life.

That formula alone is insane. Who is able to retire on their highest wage? In the real world it is based upon your average pay. So is this is done every year it will give them benefits for their average earnings.

People can coast until the last few years, then work overtime getting huge benefits. People can become sick or get demoted toward the end..which is also unfair. What is being suggested is fair, to worker, the tax payer and generations that follow because we don’t put them into debt.

It is good accounting, because teachers/employees will know their true pay.

Current system only works for the unions, making promises they can’t keep.

Two possible solutions:first up, the futuure recipients of these benefits should pay more into the program. (will never happen), second, stop committing funds to feel good projects and direct some of these misspent dollars to these obligations. (again, will never happen).

The unfunded obligations exceed the entire “net worth” of the State Government by over $4 billion – in the private sector that’s called being bankrupt. In the article Don Turner talks about several millions in savings and while admirable, these adjustments are a mere “drop in the bucket” compared to the scope of the problem. In the end it is the taxpayers that are on the hook for the debt the legislature has created. There are solutions, however they are too painful for Vermont’s political class to consider until the waters of insolvency are lapping over the bow of the ship of state and the band is striking up “God Save the Queen” on the fantail !